Why Are You Selling Your Business?

Selling your business is a big decision, and knowing where, when, and how to start that process presents immediate obstacles for most small business owners. It raises a lot of questions that can cause even more sleepless nights. You’re not selling your business because you feel coerced into doing it. You’re selling your business because you made a decision. It’s time to move on. But selling a business is not your business; at least, it’s not what you do on a regular basis. You may be familiar with the sales process, maybe you even went through it if you bought your business. But this is an important milestone in your life, and you don’t want and probably can’t afford to make a mistake. Your day has come. It’s time to get answers to some of your questions. It’s time to get busy.

The good news is you are taking measures to ensure you do it right. You’re not going to sell today, but you’ve made the decision. You’re ready. Now your goal is to get the most from the sale of your business and maximize your return.

You’re not alone. Small business owners make the decision to sell for lots of reasons and those are as diverse as their reasons were to start a business. According to Forbes magazine, there are close to 28 million U.S. small businesses; and, according to the Small Business Administration, roughly 750,000 new small businesses are started every year in the United States.3 Determining the exact number of businesses sold each year is difficult, because many times the assets are sold, and the original business closes. Here are some of the common reasons owners decide to sell. Do they sound familiar to you?

Your Goal Is to Maximize the Value of Your Business

No matter why you’re considering the sale of all or part of your business, you’re making a critical decision about your future. You’ve decided that it’s time to put your current business behind you and move on to something else. Maybe your business was or wasn’t performing well. Whether your business was or was not successful. It doesn’t matter. Everyone has the same goal when they sell a business. It is to optimize the value of their business and get the greatest possible return from the sale, so they can afford to move on to the next stage of their lives. Everything we will discuss from this point on is intended to help you get the most from the sale of your business and to maximize the value it returns.

Now that you have made the decision to move on with the sale, you will need to understand the process you are about to begin. It’s time to become proactive. You must be prepared to be the one who drives the sale. You can get advisors, but you can’t delegate this job to others—you must be prepared to take it on yourself if you’re going to have a successful sale.

Not Every Business Can Be Sold

The simple fact is that not every business can be sold. Take the time to gain some situational awareness by examining the environment you’re trying to sell your business into. Is the industry growing or shrinking? Is the location still conducive to this kind of business? Is the economy encouraging investors or are people being conservative about beginning a new venture? These environmental factors are beyond your control but can be factors in the sale of your business. Ask yourself the following question--sometimes the answer is hard to hear.

“Is this the right time to sell a business or would I benefit from waiting a year?”

There are many reasons why even profitable businesses can’t be sold. Okay, so now you’re confused . . . or maybe it’s me. Just a couple of paragraphs ago I said, “most businesses have some value.” Some businesses may have value to the owner but not for a buyer. Identifying something of value for a potential buyer is the goal in a sale. In my previous comments I was making the point that even a business that is not profitable may have value for some buyers. In the example of the surf shop, I pointed to the potential asset value of a business (its inventory of surfboards). The value could be in the real estate, equipment, intellectual property (IP), or even a popular business name (its brand) can have market value. These things have potential value to a buyer; even if the business itself isn’t profitable, there may be a buyer out there who sees some value in it and is interested in purchasing some part of the business. Profitability is not the sole measure of a business’s value (although profitability doesn’t hurt, either). The projected or future value of a business is also transferrable value if a buyer believes in that future. There are also profitable businesses that don’t offer value to a buyer. They have value to the current owner, but that value isn’t transferrable to a potential buyer.

My own business Diligent, Inc. (Diligent) is an example of a business with nontransferable value. Diligent is a small consulting business that my wife and I operate. My wife says I should call it a boutique consulting business! By design, Diligent has never had more than two or three full-time employees; we only take on one or two clients at a time. This is the business model under which I have chosen to work and that has supported me for years. We offer operations management services, positioning services, and due diligence services to our clients, who mostly come to us through referrals. We’re not interested in growing Diligent into a twenty-employee consultancy.

Diligent was built on our personal experience, skills, and reputation for improving client operations while helping them grow their business. If we were to try to sell our business, we would have to remove ourselves, and there would be no transferrable value remaining in the business. Without us, Diligent does not have transferrable value that would interest a buyer. For some owners that’s a tough admission. In our case it reflects the limits we established for our business. This allows us to do what we enjoy doing. Under a different model, if we choose to grow the transferrable value of our business, we would have to bring on staff and other consultants and focus on growing our own business instead of focusing on growing our clients’ businesses. Personally, I don’t need a gaggle of employees to feel successful. I have had the opportunity to manage a large staff several times in my career and choose not to do it any longer (managing employees takes a lot of time). When I have employees, my job becomes managing them, which doesn’t allow me the time to be an advisor to my clients—the job I prefer to do.

Similar cases also exist where the transferability of value is constrained because the business requires professional licenses that are tied to individuals—for example, financial or real estate certifications; alcohol or other products needing extensive background checks, or agricultural licenses needing specialized training, for example. If the license is not transferable, then it doesn’t add to the value of the business. It’s important to know the local regulations for professional licenses because they change state by state or province by province (be sure to include the transferability of professional licenses in your discussions when you meet with your attorney). These businesses can be sold, but the new buyers must be licensed—meaning the transferrable value of the business comes from its assets. Because the rules for professional licenses are subject to frequent change, you should be wary of making assumptions about them. Also, be aware that there are regulations limiting the ownership of certain businesses only to licensed individuals. This could restrict the pool of buyers; you must see the potential buyer’s license to qualify them as a buyer.

Look honestly at your business to determine whether there is value that can be transferred to a new owner. A business that is tied to a unique location, for instance, may lose a great deal of value or may not be salable if that location were no longer available. What gives your business its transferrable value?

My wife and I like to eat out on occasion and had two restaurants we particularly liked. One was a seafood restaurant located on a pier overlooking the water near our home. The pier was damaged during a storm, and the restaurant was forced to close. The owners decided to sell the name and menu to a buyer who reopened the new business several blocks from the water. Even though the business had the same menu and the same cook, it had no water view, and their business never took off like the original one had. Without the unique waterfront location, the new restaurant was just another inland seafood restaurant among many others. The value of the original business didn’t transfer. Dining on the water is what had attracted customers. Loss of their original location meant the loss of significant transferrable value regardless of the restaurant’s past reputation or profitability.

The other restaurant was an Italian restaurant. It was owned by a couple who had operated the business for years. The restaurant had built a reputation for the high quality of its traditional dishes along with a reputation for great service. This business was popular for years and always drew a crowd on the weekends. Eventually, the couple retired and turned the operation of the restaurant over to their grown children. Their children, who had benefited from the business and had gone to college to earn business degrees, promptly put in changes they thought would improve the business, but it seems people preferred the traditional Italian dishes rather than the new menu that was served to lower the operating costs. As the quality of the food went down, so did the crowds. The children realized they were in trouble and decided it was time to move on. There was transferrable value in the business because of its prior reputation. The new owners understood this value. They immediately put up a sign saying “Under New Management” and returned to the original menu customers had known for years. Reputation and good will definitely affect the transferrable value of a business.

Look for any situations that limit the transferrable value in a sale. Many times, there is something you can do to improve the transferrable value of your business. However, not all businesses have transferrable value that can be sold. It’s critical that you take the time to identify the true transferrable value of your business and be ready to take the steps needed to improve and spotlight that value as much as possible.

While you are operating your business, you are running a race to achieve success every day. When you sell the business, the race may be ending for you, but the buyer doesn’t want the race to be over. They need to believe that, as you’re passing the baton, the race will go on. They expect you to pass the baton on to them as efficiently as possible. Now it’s time for you to look in the mirror and have an honest conversation with yourself about the value of your business. What exactly is it that you are selling? Does it offer something of value that can be transferred to a buyer?

“What value does my business have that I can pass on to a new owner?”

Can I Sell My Business If It Has “Warts”?

The nature of business is that things can and do go wrong. Keeping a business at its peak operating efficiency is difficult, because the business is impacted by things beyond your control, such as market changes, the loss of major clients, weather events that can disrupt a business’s operation, and demands of key employees (e.g., unanticipated raises). A wise person knows: when you operate a business, doo-doo occurs—or similar words to that effect. Smart buyers also understand this and know that all businesses have warts. Buyers will use undisclosed warts as part of their negotiation strategy.

“We’re lowering our offer because you knew this was a problem and didn’t disclose it.”

You are always better off acknowledging and disclosing your business’s warts rather than trying to hide them. By exposing problems at your own pace, you avoid pesky ethical and moral issues and will be in a better strategic negotiating position than if the problems show up (which is usually when you least expect them). I’ll repeat it: you must honestly disclose any known issues.

I find that businesses are typically sold the same way they are operated. If your operations are sloppy and you’ve done nothing to improve them, you won’t achieve the same level of return you would from a highly efficient operation. If your business has warts you don’t want to disclose, fix them. “Deny, deny, deny” may work as a political strategy, but when selling your business, a better strategy is to “admit, admit, admit.” Follow each admission with a “but.” Be prepared to take the high road. Be honest. There is no better way to kill a deal than by being caught in a lie. If I find a client is intentionally trying to mislead a buyer, I drop them immediately as a client. My reputation is far more important to me than any individual deal could be. Be prepared to discuss any due diligence discoveries during negotiations.

“Due diligence” is an umbrella term. It includes a hands-on, deep dive into your business that allows the buyer to collect information about the business and gain a detailed understanding of its past performance, current standing, and future potential. During due diligence, the buyer will assess three distinct facets of your business: financial, legal, and operations. We will cover due diligence in detail in Chapters 7 through 10.

“We tried something, but it didn’t work, so we moved on.”

Your goal is to negotiate from a position of strength. You can’t do this if you ignore or hide an issue. Any such issue should have already been factored in your valuation.

“Yes, we introduced a loss leader product to see if we could sell into that market, but withdrew it when it became clear our price wasn’t supported. It wasn’t part of our normal operations, but we included the expense of our experiment as an adjustment when we valued the business.”

The problem is that many business owners have trouble being honest about the condition of their business—especially to themselves. It’s called “drinking your own bath water” or whatever phrase you wish to use when you delude yourself into believing you have built the perfect business. If you’re trying to present your business as something it’s not, then either change your presentation or change your business.

Be prepared for the buyer’s due diligence to discover something. They will find something, and they will use what they find as a negotiation strategy. We will have more to say about due diligence later in the book, but for now, ask yourself this: if the buyer’s due diligence will cost me something during negotiations, would it pay me to perform a due diligence on my own business? The answer: why wouldn’t you want to do that? If you can’t effectively perform your own due diligence (most people can’t), then hire an independent third party to do it for you. The goal of a buyer’s due diligence is to allow the buyer to enter a deal with their eyes wide open. The goal of an internal due diligence is to allow you to enter a sale with your eyes wide open. With your own due diligence in hand, you can either resolve any discoveries or prepare to discuss them, thus giving you a negotiation strategy.

“Yes, we knew about that and already accounted for it in our valuation.”

I sometimes think people leave obvious issues for the buyer to discover during due diligence, hoping it will distract the buyer from finding the real issues. Understand, I’m not advocating this approach as a success strategy, but it sure seems to happen!

Why Do I Need to Position My Business to Sell It?

Positioning means preparing the business to be presented to prospective buyers. Your business needs to be positioned to demonstrate its full transferrable value to a buyer. It’s like priming a wall when you are preparing to paint it. You will need to take the time to touch up the rough spots and patch the holes to create a solid base before showing a buyer your business.

Positioning includes far more than the outside appearance of the business. You may need to put on a fresh coat of paint (and that’s as far as the paint analogy goes), but more importantly, you will also need to be prepared to:

One of the best ways to accomplish this is to always operate your business as if it is for sale, knowing that someday you expect it will be. Think about the logic in this. Operating your business at its peak attainable efficiency, even if you’re not ready to sell just yet, is exactly how you should operate it in any case. In the following chapters I will describe steps you can take to help prepare your business, by positioning it to maximize the return from its sale.

As important as preparing your business may be, the other important reason for positioning is that it forces you to do your homework and prepares you to drive the sales process rather than being a passive observer in what may be one of the most important transactions you will be a party to. It forces you to make the business operate efficiently. If your business is going to be prepared, then you must also be prepared.

My goal is to help you take on this task effectively. One important way to achieve this is to begin the positioning process well ahead of the anticipated deal closing date. The decision to sell a business should never be made on impulse. Plan, plan, plan!

If you have your back against the wall, you will be in the worst possible negotiating position. It’s difficult to position a business for a fire sale. Selling a business is a strategic move that should be well thought out and planned well in advance of the actual event. Your business will be the product, and you need to take the time to market that product to get the greatest return for it. Operate your business as if it’s for sale—that way it will be ready to sell when you are ready to sell it.

I’m Really Busy—How Much of My Time Will It Take to Prepare My Business?

Selling a business, in whole or in part, will take a considerable effort on your part—you will need a strategic plan, preparation, and commitment to execute that plan. You must be able to commit your time and resources for a successful sale if you want to maximize the return from the sale of your business. Regardless of how well your business has done, successfully closing a deal and putting together an optimal sale will require the same dedication and commitment from you in order to maximize your return.

Selling your business is a unique event in the life of the business. It is unique because many of the tasks required to maximize your return from the sale are outside the normal operation of the business. It will require additional effort beyond that needed for the continuing operations of the business, and it may include the addition of dedicated resources to effectively support the sale and supplement your time. You will want to limit the involvement of your employees to support these extra activities. Your employees probably don’t have the right skill set; they may panic if they know you intend to sell; and your staff should not be diverted from their usual jobs (you need them to be busy demonstrating the value proposition of your business). You may want to consider hiring additional staff or contracting specialized help to form a team whose mission is completing the sale.

No matter where you plan to find the resources to prepare for the sale, you must keep the operation of your business running as efficiently as possible. Whether you’re running a software development business or an ice cream shop, you must meet your development schedules. Someone must continue to scoop the ice cream, continue to order supplies and inventory, and continue to pay the bills and mop the floor. At the same time, you will need them to remain busy doing their regular jobs when a new buyer starts their due diligence. This is not the time for letting software releases slip or the ice cream cones melt Because you have re-tasked your employees to write a business plan!

This is also not the time to lose interest. You must take the necessary steps and provide any resources needed to demonstrate that there is continuous value. Remember, your goal is to pass the baton to a new owner and not let it appear the race is over. This is difficult if you take the runners out of the race!

If your business has been successful, then congratulations! But don’t relax just yet. You still have some hard work to do to achieve an optimal exit. All the work you have been putting in to grow your business is about to pay off. Don’t plan that fishing trip with your cousin just yet. Be prepared to postpone your vacation for a while and get busy working at your new job—preparing your business to be sold.

And while you’re doing your homework and preparing to move on, keep this in mind. Expect that at some point your friends or family will look at the money you earned in the sale and tell you how lucky you are! Well, luck may have played a role in your success, but realistically, selling your business will require hard work, just like building it did. If luck does play a role, be thankful, but don’t count on it. And be ready to tell your family and friends about the financial risks you have taken, the long hours and dirty jobs you had to do to earn your success, and the effort you put into sell your business. You will likely have to tell some of them that you’re just not willing to give them the loan they may ask for to back their great idea. Closing a good deal with the right buyer takes planning and forethought.

If selling your business can best be described as “getting out from under,” and you are in a hurry to move on, don’t let the fact that you’re in a rush to sell stop you from putting in the needed effort to position your business. Understand that, unless you are exceptionally lucky, your exit won’t achieve the same kind of success as a business poised to continue to its next stage of growth. Understand that there are things you can do to improve your return. If you are holding a fire sale, don’t be discouraged. Keep in mind that there are investors who look for fire sales. You will still need to be prepared if you hope to maximize the return from your sale. And if you are going to have to borrow the money to pay off those pesky creditors (and pesky employees if you owe them any back payroll), you will still need to maximize the return from the sale of your business. Now is not the time to quit.

How Long Will It Take to Sell My Business?

The expression “patience is a virtue” doesn’t seem to apply when you’re trying to move on from your business. Once an owner makes the decision to move on, they become impatient and want to make it happen as soon as possible. You could take the approach of just hanging a “For Sale” sign in the window or listing your business on an internet bulletin board to sell it—unless your goal is to maximize your return. Assuming your goal is to get the maximum return possible, you will need to prepare your business by positioning it to be sold. Planning for the sale of your business should start at least a year ahead of your intended closing (two years is not unreasonable).

What? Was that a retching noise I just heard from the back row? You wanted to put the “For Sale” sign out tomorrow, didn’t you? Of course you did, and I understand that many sellers will not be able to delay the closing for a year or more. One to two years is a long time when you are eager to move on (or need to cash out quickly). Can it be shortened? Three to six months is possible, but you will have to get busy and be willing to accept some risk. Keep in mind, when you shorten the positioning time, you may not have effectively prepared your business. You are constraining the amount of preparation you’ll be able to do, and therefore you’ll be limiting the amount of optimization you’ll be able to accomplish. The steps you take to position your business, and the extent to which you are constrained from taking those steps, will affect the outcome of the deal. If you have been running the ideal business, maybe it won’t take as long to position and sell it—or maybe you don’t have the time and can’t wait to get the optimum results. Whatever your circumstances, it’s time to get busy.

And a Final Consideration

All businesses have one thing in common: to sell them, you need to show a buyer there is transferrable value and an opportunity for further success by acquiring (or merging with) the business. It helps to put yourself in the buyer’s shoes by imagining what the buyer sees when they look at your business. Your job now is to create the image you want them to see. The race is on. You are preparing to pass the baton to the new owner.

Jim’s Bakery Example: Overview

Welcome to Jim’s Bakery—combining the best of small-town retail friendliness with a large-scale regional baked goods distribution for our commercial customers. Jim’s has been in business for thirty-five years and has a loyal following of retail customers who return year after year for personalized cakes and other specialty items, particularly around the holidays. Going to Jim’s has always been the first stop for enjoyable family events, such as birthdays, graduations, and other happy occasions. Fifteen years ago, Jim’s Bakery expanded its operations by adding a commercial bakery that supplies breads and other bakery items to local restaurants and other regional outlets. The loyal retail customers love finding Jim’s Bakery breads and rolls in their local food stores because they know the quality for which the name stands. To help maintain their reputation for fresh baked products and to protect their brand, Jim’s Bakery requires its commercial customers to remove any unsold products within twenty-four hours of delivery.

Jim’s Bakery operates two facilities. The first facility is the original retail bakery, where they produce the cakes and specialty items, and the second is their commercial bakery that supports their “Bread as a Service” (BaaS) product line. The commercial bakery and the administrative offices for the business, located above the commercial bakery, are in a leased facility. The founder’s office is located in the back of the retail store, which Jim owns. Jim likes to walk into the front of the store where he can greet people, as a way to remain close to his customers. This is not just nostalgia. Jim realizes that many of his commercial customers also started as retail customers.

After thirty-five years in business, Jim is ready to sell the business and retire to St. Thomas in the U.S. Virgin Islands. He is looking for a buyer who will continue to grow the business while maintaining its reputation for exceptional service and quality products. All rights to the Jim’s Bakery brand and recipes, which have been used and improved upon for thirty-five years, are included in the sale.